Second Cup to convert some cafes into dispensaries » strategy

Second Cup to convert some cafes into dispensaries

The coffee chain taps into future demand through a partnership with National Access Cannabis.
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National Access Cannabis (NAC) has established a partnership with coffee chain Second Cup to convert some existing coffee shops into cannabis dispensaries once it is legalized this summer.

NAC will be submitting applications for licenses to operate cannabis retail locations, beginning with Alberta, British Columbia, Saskatchewan and Manitoba – where privately run cannabis stores will be allowed – before expanding to other provinces where it is legally permissible. After acquiring the appropriate licenses and receiving approval from Second Cup, the franchisee and landlord, select cafés will be converted to a NAC-branded dispensary.

In a joint press release, NAC CEO Mark Goliger said the partnership with Second Cup offered an opportunity to quickly expand its physical footprint by utilizing an established retail network with many locations in high-traffic areas.

National Access Cannabis is an organization that works to help would-be medical cannabis patients receive prescriptions and get connected with a licensed producer. But despite its previous focus on the medical consumer, this isn’t its first push into the recreational retail market.

NAC was one of four entities selected to operate retail stores in Manitoba. In an email to strategy, Goliger said it was possible that current Second Cup locations may used as its first cannabis retail stores in the province, though he pointed out that most café locations stepped on provincial or municipal restrictions on where cannabis could be sold, with only “a couple” pre-qualifying.

Garry Macdonald, president and CEO of Second Cup, said in the release that while the company remains committed to growing its own brand and network across Canada, the partnership was an opportunity to leverage its locations “to increase value for shareholders and franchisee partners.” While the plan is for locations to have NAC branding and be operated by the company, ownership will be equally split with Second Cup, who will keep the long-term leases and franchisees receiving part of the earnings.

According to its 2017 annual report, there were 286 Second Cup locations in operation as of Dec. 30, down from 294 the year prior. While revenue at Second Cup fell from $30.4 million in 2016 to $23.6 million in 2017, with same-store sales down 0.2%, the chain reported an adjusted net income of $110,000, up from a $975,000 loss in the previous year. Operating costs at Second Cup were also down by $8.7 million in 2017 compared to the year prior.

Second Cup, the second-largest coffee chain in Canada, has struggled to keep up with stiff competition in its category in recent years. It has tried numerous approaches to turning business around, such as evolving café designs and an increased focus on product quality and craftsmanship.

As part of the partnership, NAC has issued to Second Cup warrants to purchase an aggregate of 5,000,000 common shares of the company.